BP’s Coal Interest: Kaltim Prima

Longer version published in ‘Down to Earth’ newsletter 52, February 2002

BP currently jointly owns and manages Indonesia’s biggest coal mine. It has 50% of the shares in PT Kaltim Prima Coal (KPC), a massive open cast mine near Sangatta in East Kalimantan. The Anglo-Australian mining giant, Rio Tinto, owns the other 50%.

KPC is currently embroiled in a power struggle with the local authorities as, under the initial agreement, this foreign-owned company must sell off 51% of its shares to Indonesian parties. Tension has been rising since regional autonomy legislation came into force in January 2001. The East Kalimantan provincial government is determined to get its hands on KPC’s lucrative operations. If a deal is made, it will be the first time that a regional administration is involved in running a large-scale mining business in Indonesia. KPC claims the local authority’s aggressive attitude is making foreign investors wary about future involvement in Indonesia.

In October 2001, the East Kalimantan provincial government started legal action against KPC for failure to divest its shares. The local authority is seeking US$772 million damages, $4m legal costs and seizure of company assets. Rio Tinto has threatened to pull out of PT KPC completely if the court rules in favour of the East Kalimantan government.

The East Kalimantan authorities are keen to acquire a majority shareholding, but KPC does not want to lose control to a single investor. It is not hard to see why both sides are so determined. This is one of the world’s largest coal mining companies with an output of around 15 million tonnes per year and reserves estimated to last for another 20 years. The KPC concession contains around half the 4.41 trillion tonnes total proven coal reserves in East Kalimantan. The coal is high quality and, despite strikes in 2000 and 2001, labour costs are relatively low. Government revenues of over US$300,000 a day (derived from 13.5 per cent royalty on coal sales and 35 per cent income tax) on a daily output of over 50,000 metric tonnes of high quality coal give some idea of what the mine is worth.

From January 2001, most of these revenues (80%) go to the local government instead of to Jakarta. Under current rules, the provincial government only gets one quarter of the local government’s share; the rest goes to district level.

KPC has its own deep water port on the East Kalimantan coast. The mine employs over 6,400 workers – 2,600 employees and the rest via subcontractors. Rio Tinto alone is said to have invested US$450 million in the site.

Negotiations reached deadlock in mid-2001 over the valuation of the shares. KPC insists that only the company and central government have the right to determine share prices but Jakarta has been reluctant to take a stand. The deadline for agreement has now been extended until March 31st 2002.

Although East Kalimantan is a rich province, US$450 million is a lot of money to raise for the 51% share. The local government has apparently chosen a private investor to finance the acquisition: the Jakarta-based company, PT Intan Bumi Inti Pradana , but this may – in turn – be raising money from other companies. The East Kalimantan authorities have not released any information about the financing or who is behind the company. According to one report, the local government would get 10 per cent of the stake for free. Two sons of top East Kalimantan administration officials are believed to work at PT Intan.

Strikes and compensation

A series of strikes and compensation disputes with local landowners cut KPC’s output in 2000 and 2001. Compensation claims are still outstanding for 7273.5 hectares of land in and around the mine site. KPC agreed to pay around Rp 10 billion (US$1 million) to end a land dispute with villagers from Bengalon in February 2001, but refused to meet the demands of 600 other farmers for Rp 3.3 billion to cover more than 3,000 ha of their land taken for mining activity. The company insisted that it had paid adequate compensation and blamed manipulation involving insiders.

Farmers from Kabojaya village near Sangatta have protested to the East Kutai district over pollution from KPC. The villagers say that waste from the mine made it impossible to grow crops. They also could no longer use the water from the Murung river for daily activities like cooking, bathing or washing. The people demanded compensation of around Rp 1 billion, but KPC have offered an irrigation facility worth Rp 700 million instead. KPC have hired an Indonesian subsidiary of the European company Group 4 to provide security for its operations since August 2000. This has also been the cause of protests as local people feared losing their jobs to outsiders.

KPC has tried to get on the right side of the local authorities by committing US$1.5 million a year to community development projects in East Kutai district. This has funded Sangatta high school, a micro credit scheme, a health programme and agricultural projects.

The authorities are reluctant to impose controls on KPC’s operations and do all they can to prevent stoppages because of KPC’s impact on the local economy. Thousands of workers living in or around the town of Sangatta depend directly or indirectly on the mine for jobs. Most of the local population comprises settlers from other parts of Kalimantan, Sulawesi and Java.